Thoughts on Debt

Many people find themselves in hard financial times and are wondering what they can do to dig themselves out of the hole they are in.  Well, the key to it all is devising a budget and sticking to it.  Many of us believe that we are already living on a budget, however, unless your budget includes a savings, then it is really not a budget.  A budget is not scrimping and living paycheck to paycheck paying whatever bills you can each week, it is much more than that.  It is a financial plan, the foundation by which you determine how much you can afford to spend on the extras.  Built into your budget must be a savings plan that will allow you to put no less than 5% of your income aside for emergencies.  I personally prefer a two savings plan system, where you divide your savings into 2 separate accounts, one for true savings and one for savings for special things that you would like to do like a vacation, or for a special item you want like a new TV.  This is a good way to be able to reward your hard work saving and feel a benefit from it.  It will make you feel less deprived in the long run if you reap some benefit from the savings.

In order to create a budget your monthly income must exceed your monthly expenditures.  For instance, you can not budget your money if your monthly expenses are $3000 per month and your monthly income is $2400, this will not budget out.  If after writing down your expenditures for a month and your income, you find yourself in this boat then it is time to trim the fat off your regular monthly spending and if you still can’t get your expense low enough then it may be time to consider picking up an extra job.  The fact is that a budget is a plan by which you spend, and without one you are free falling into a life of poverty.

Keeping your life in balance will allow you the peace and harmony that you seek from life.  Having enough money to pay the bills with a little left over will allow you to sleep better at night without worry.  Take the time to work out your budget and you will see how easy it is to keep your finances under control.

Usury by definition is the loaning of money at exorbitant interest rates. This is a term that is condemned by both the Torah and the Koran, so why is it that it is our primary theme in American culture? Many people would say it is so that we can own a home, a car, and so forth, but if you think about all the debt in this country and the fact that our government is the primary benefactor of the interest we pay, there may be something to the fact that maybe we are just convinced that we need to live in debt. Look at the facts:

Credit card debt with interest rates hovering at about 24 percent used to be a crime, but since our government entered the picture, there are no real corporate crimes anymore. And as wages shrink and prices soar, American’s will use more and more credit to hang on to their “I want it now” lifestyles.

College tuition debt, the new growth area in the debt industry. In most Western nations college education is free or nearly free. This type of debt gets the youngest adults in our society started off in debt before they even can get a reasonable job. Why is it that in other countries, they can get an education for nearly nothing, but here in the US the government who runs the colleges for the most part is benefiting 2 fold from these monies. First they benefit from the money that is paid for the schooling, and then they benefit from lending you the money to go to school, how is this legal?

Medical debt, the latest twist in the health care story in America. While health care is a right and is publicly financed in most countries, in the U.S. 42 percent of Americans either have no health care coverage, or have pay-nothing private insurance scams. Again, who is getting the money we pay for medical care? Oh, that’s right it is our government.

Mortgage debt. Need that dream house, the little place with the white picket fence. No problem all you have to do is make payments of half your income to a mortgage company for 30 years. Now they have even made arrangements for poor people to get in on the act with sub prime loans and buy it now pay it later loans, this way they can be in debt like everyone else.

National debt, my favorite. A small percentage of people, through both good fortune and wise decision-making, avoid the debt trap. But not to worry, everyone pays taxes — well, everyone below a certain income. Now that is us paying off our country’s debt, well all the welfare spending money, tax breaks for the rich, and military spending money, has to come from somewhere right. Don’t worry you are paying that off and currently each one of us owes the Federal Government about $32,000 each to pay off their “deficit” which that is right comes out of our pockets too.

Thank goodness our government has us to take money from on a regular basis, otherwise they might go broke.

As a society, we tend to ignore and turn away from things that we don’t like.  Avoiding conflict and problems has been a theme in this country for a long time.  We don’t mean to do it, but somehow we think that if we turn our back to our problems that they will magically disappear.  This is not the case, especially when you are in debt.  The best thing that you can do with debt is to confront the issues head on.  Many people who can’t pay their bills, avoid debt collectors and credit card company phone calls and letters and just hide.  It can sometimes be difficult to deal with these people, especially because when they call they can be very rude at times, and most people actually wish they could pay back their debts and so usually the debt collectors get mean and the people feel bad.  You MUST face the company, even if it is by letter, and you must create a plan in your own mind for repayment.  Even if you send them $20.00 a month.  Now most companies will tell you this type of payment arrangement is unacceptable, some however, will work with you to bring it to resolve.  In any case, you need to devise a plan to repay it.

Now there are, for your information, some debts that it is not wise to make payment on.  These would be the debts that have already exceeded their 7 years on your credit report.  The reason I am telling you this is because one payment on those debts, and they move their way right back to your credit report again.  Once you make even the smallest payment on them, they will become active and will be back on the report.  Some debts unfortunately when they have exceeded their life on the credit report and still don’t get paid, are better left unpaid. These are the ones that will hurt your credit score if paid. Working to clean up your credit is not always an easy task, however some companies will give you a discounted pay off and will pull the item from your report in exchange for a payment, so don’t hesitate to ask for this.  They can do it for you.

Be sure to face your creditors head on.  Talk to them and try to work with them.  Problems if avoided will only get worse over time, so be sure to address the problems and see what you can do to resolve the issues before they get any larger.

Many people remain uninformed about credit card debt and about credit cards in general. When asked about their debt, 35% of American’s said they carry balances on credit cards, and about 5% said they didn’t know. (How do you not know?) Maybe it is just that they don’t want to admit it. Studies by the Federal Reserve and data release by credit card companies indicate that the percentage of households with credit card balances in this country is at least in the mid 40’s. It could be even higher with the economy on the down swing.

In a separate study, nearly 2/3 of more than 1,000 people said they carry a revolving balance on one or more of their credit cards. Another 8% said they didn’t know whether or not they did. And 15% of people with credit cards say that they have experienced at least some amount of difficulty in paying their minimum balances. They continue to do studies about consumer debt which still show that most consumers don’t really understand the whole thing. They have a limited understanding of reading their credit report, understanding their credit scores and in spite of this they say that consumer knowledge about credit is improving. For example, less than a third of Americans understand that a credit score is a number that estimates your likelihood of paying back a debt. A credit score is based on but is separate from your credit reports. The three major credit reporting agencies are Equifax, Experian and TransUnion and the best known credit score is the FICO . The best way to improve your credit score is to pay all your bills on time. The range is about 300-850 and the higher your score the better the credit you can get and the lower the interest rate available to you.

More than a third of American’s were unaware that insurance companies use credit scores to approve your coverage and to set your rate. Less than 3/5 knew that regularly maxing out a credit card, even if paying your bills on time will lower your credit score. In addition, 79% of American’s thought they could get their credit score free once a year, however that is your credit report, not your credit score. You generally have to pay about $15 for your credit score number.

Most people don’t realize that they need to be checking their reports for accuracy every year, and they should check their credit score every few years and before they apply for a mortgage or other large line of credit. Washington Mutual estimates consumers can reduce finance charges by $105 a year on average by raising their scores 30 points.

Knowledge is power and knowing more about credit, how it works, and how we can make it work for us, is an important part of the system. Getting information now about credit, debt, credit score and other credit information, can help us improve our credit score and keep it in good standing. This can open up some major opportunities for you. Just remember it is never too late to start improving your credit rating.

Credit cards can be a very helpful tool, but they can also be one of the biggest financial pitfalls if you are not careful.  There are some things that you need to know when applying and using credit cards.  The following are some tips to using your credit cards wisely.

1.  Make sure you are aware of changes in rates and rules.

2.  Pay your balance monthly, even if it means taking out a personal loan.

3. Apply for a card with a credit union instead of a bank, they have less fees and lower interest usually.

4. Don’t use credit cards when traveling abroad.  Conversion fees are steep, instead use an ATM machine to access your bank account or use traveler’s checks.

These are just some wise tips in using your credit cards, however, there is a whole other realm of credit card use that you must be aware of.  This is when the credit card companies change rules mid stream or offer low rates to draw in your business and then raise them without you being aware.  Some recent reports show that consumers have been fooled by some of these “tricks” and so these are the things that you need to be aware of.

YOUR RATES ARE RAISED WITHOUT YOUR WARNING

You are going along and paying your bill on time but you have a late payment on another card, or your credit score drops for some reason and the credit card company raises your rate on all of your cards.  Even if you come close to your credit limit, this can cause your rate to increase even if you haven’t exceeded it.  If this happens your credit card company is required to let you know so be sure to read all the correspondence from them carefully and keep a close eye on that bill.  No one needs surprises like this, and it is perfectly legal.

YOUR DUE DATE CHANGES

On late payment can allow them to raise your interest rate higher then you probably even think is possible.  Due to this, some banks unknowingly will change the due date on your bill, so that your payment is due sooner than you originally thought, causing your payment to arrive late and giving them license to raise your interest rate.  Again, look at that bill very carefully as this is another completely legal practice.

EXTRA CHARGES AND PENALTIES

Know how much extra your credit card company will charge you for cash advances and balance transfers before doing them.  Large fees can be associated with these types of transactions and once you do them, you will be stuck with the bill.

MISLEADING INTRODUCTORY RATES

You will receive credit card offers for low interest credit cards, and you think this is great and you transfer your balances or run up the card and then you find out that the interest rate shoots up to about 30% after the first month.  Be sure to read the fine print and keep in mind that if an offer seems too good to be true, it probably is.

MANDATORY ARBITRATION

Keep in mind that about 75% of credit cards have clauses that say disputes must be resolved in private forums, so when issues arrive you can’t take them to court.  Even if those issues are ones of identity theft or things that are out of your control.  Studies have shown that if you take a company into arbitration you will lose since in arbitration the credit card companies win on the average of 96% to 99% of their cases against consumers.

In short, be sure to think twice before buying on credit, and be even more rigorous about reading your credit card statements and applications.  These are the keys to keeping your money in your hands.

Most American’s are carrying a lot more debt than they can afford.  Credit card debt in the US has reached a record high - Nearly $1 trillion, according to the latest figures from the Federal Reserve Board.  The average American household’s debt from credit cards has risen from $2966 in 1990 to $9840 in 2007.

As getting loans becomes more difficult and the cost of groceries and medical bills is on the rise, more and more people are turning toward plastic instead of cash to meet many of their basic needs.  For many of us easy credit has lead to spending well beyond our means.

The debt crisis in this country however, is created less by our spending and more as a result of an industry devoid of regulations and checks and balances.  For too many years, the credit card industry has been allowed to run rampant with charges and additional fees well beyond what is reasonable.

Consumer complaints and pleas for help may be having an effect.  Both the Federal Reserve and Congress have proposed new rules that have broad support.  Unfortunately, action has not yet been taken, but it is on the horizon.

The real problem is that the credit card companies make the most money on those of us who can’t afford what we spend.  This is why if you pay your bill in full every month, the credit card companies have a term for you and surprisingly they think of you as a “deadbeat”.  They deliberately target those who can not afford to pay their bills.  As a matter of fact, if you are having trouble paying your credit card bills, then you will more than likely receive some extra credit card offers in the mail.  They all want you to borrow from them.

We can hope that the legislation will soon be coming down the pike to give these big companies what they truly deserve and perhaps bring some relief to us all.